28 August 1964
Supreme Court


Case number: Appeal (civil) 193 of 1962






DATE OF JUDGMENT: 28/08/1964


CITATION:  1965 AIR  621            1965 SCR  (1) 186  CITATOR INFO :  R          1991 SC2254  (5,7)

ACT: Co-operative  Societies-Moneys  earned  by  alleged  illegal transactions--Retention  by members of  management--Claim-If "a  dispute touching the business of  the  society"--Whether claim  could be made-Proceedings whether under s. 51  or  s. 49-Madras Co-operative Societies Act, 1932, (Mad. 6 of 1932) ss. 49, 51.

HEADNOTE: The appellant was the President of a Co-operative  Marketing Society  constituted mainly for the purpose of enabling  its members  to obtain credit facilities and to arrange for  the sale  of  agricultural products at  reasonable  prices.   On complaints,  an enquiry was instituted into the  affairs  of the  society by the Registrar of Co-operative Societies  and as  a  result,  the committee, then  in  management  of  the society  was, after due notice to show cause and a  hearing, superseded   by  the  Registrar.   A  special  officer   was appointed  to take charge of the affairs of the society  and this  officer  filed a, claim before  the  Registrar,  inter alia, against the appellant.  The main item of the claim was commission  stated  to  have been  actually  earned  by  the society on the sales effected by it of jaggery belonging  to its  producer  members  but which was not  credited  to  the society.    It   was  alleged  that  while  on   paper   the transactions entered into between the members of the society and the purchasers showed sales at the prices fixed by  law, in  reality,  higher prices were charged.  The  society  was entitled to charge commission on the sales effected  through it.   As  regards  this it was stated  that  commission  was earned on the entire price at which gur was sold, and  while the amount of commission payable on the basis of  controlled prices was credited to the society, the commission earned in respect  of the extra price which its members obtained  was, it  was stated, not brought to the credit of the society  in its accounts but appropriated by members of the  management. On  receipt of the claim, the Registrar appointed, under  S. 51(2)  of the Madras Co-operative Societies Act, the  Deputy Registrar of Co-operative Societies to act as an  arbitrator



to  adjudicate the claim.  Thereupon, the appellant filed  a petition  in  the  High Court for the issue  of  a  writ  of prohibition under Art. 226 of the Constitution,  prohibiting the  Deputy Registrar from dealing with the claim  which  he was directed to try.  The Single Judge allowed the petition. On  appeal by the respondent the Division Bench allowed  the appeal  and  dismissed  the writ  petition.   On  appeal  by special  leave,it was contended by the appellant,  that  (1) the  Registrar  should have proceeded under s.  49  and  not under s. 51 of the Act, (2) the dispute about the  retention of  money belonging to the Society by the appellant was  not "a dispute touching the business of the society", and (3)the transaction  of  sale  which gave  rise  to  the  commission alleged  to  be  improperly retained was  illegal  and  that therefore  the society could not, in  law, make a  claim  on the basis of such an illegal transaction. HELD : (i) The case did not fall under s. 49 of the Act.  If s.  49 did not apply, subject to other arguments  about  the illegality of the order of the Registrar, proceedings  under s. 51 was not open to objection. [192D]. Besides the factors that the claim was one "against a person in  management  of  the society"  and  "for  the  fraudulent retention of money or other 187 property  of the society", there was also another  condition which  had  to  be  satisfied  before  s.  49(1)  could   be attracted.   The facts giving rise to the charge had  to  be disclosed  in  the  course of an audit under  s.  37  or  am enquiry  under s. 38 or an inspection under a. 39 or on  the winding up of the society. [191 G-H] Sundaram  Iyer  v.  The  Deputy  Registrar  of  Co-operative Societies, I.L.R. (1957) Mad. 371, referred to.  (ii)  The claim made before the arbitrator was  "a  dispute touching the business of society".  It could not be disputed that the sale of the produce belonging to the members of the society was part of the business of the society,  and   then the charging of the commission would equally be the business of the society; and [192 G-H] (iii)     No illegality attached to the contract between the appellant  and  the society; that was perfectly  legal.   It arose  out of his, position as the President of the  Society and  he  was  in law, bound to account  for  the  moneys  he received on behalf of the society. [193 C] Kedar  Nath  Motani  v. Prahlad Rai, [1960]  1  S.C.R.  861, followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 193 of 1962. Appeal  by special leave from the judgment and  order  dated August  18, 1959, of the Andhra Pradesh High Court  in  Writ Appeal No. 111 of 1957. A.V.  V.  Nair and P. Ram Reddy, for the  appellant.  Naunit Lal, for the respondent No. 1. K.R. Chaudhuri and B. R. G. K. Achar, for respondent No. 2. The Judgment of the Court was delivered by Ayyangar   J.  The  appellant  was  the  President  of   the Anakapalli  Co-operative  Marketing Society Ltd.  A  Society constituted  mainly for the purpose of enabling its  members to obtain ’credit facilities and to arrange for the sale  of agricultural  products  at reasonable  prices.   There  were complaints   regarding  the  working  of  the  Society   and accordingly  an enquiry was instituted into its  affairs  by the  Registrar of Co-operative Societies, Madras at  a  time



when Anakapalli, now in Andhra Pradesh, was in the State  of Madras.   As a result of the facts disclosed in the  inquiry the  Committee then in management of the Society was,  after due notice to show cause and a hearing, superseded by  order of the Registrar dated February 15, 1952, such  supersession being  authorised  by  s.  43  of  the  Madras  Co-operative Societies Act (Act 6 of 1932) hereinafter called die Act.  A special officer was appointed to take charge of the  affairs of  the  Society and this officer filed a claim  before  the Registrar,  inter alia, against the appellant.  ’The  amount claimed was Rs. 13,000 and odd and details were given as  to how  this sum was made up.  The main item of the  claim  was commission stated to have been actually 188 earned by the Society on the sales effected by it of jaggery belonging to its producer-members but which was not credited to  the  Society.  On receipt of this  claim  the  Registrar appointed,  under S. 51(2) of the Act, the Deputy  Registrar of  Co-operative  Societies,  Visakhapatnam  to  act  as  an arbitrator to adjudicate the claim.  Immediately  this  order was passed the appellant  filed  a petition  in the High Court of Andhra Pradesh for the  issue of   a   writ  ,of  prohibition  under  Art.  226   of   the Constitution, prohibiting the Deputy Registrar from  dealing with  the claim which he was directed to try.   The  learned Single Judge who heard the petition allowed the petition and granted  the  appellant  the  relief  he  sought.   ’Me  Co- operative Society took the matter in appeal to the  Division Bench  of  the  High  Court which  allowed  the  appeal  and dismissed the writ petition.  Thereafter the appellant moved this Court for special leave (certificate of fitness  having been  refused  by  the High Court)  and  has  preferred  the present appeal. Before adverting to the arguments addressed to us by Mr. Ram Reddy, learned counsel for the appellant, it is necessary to state  a  few facts concerning the transactions  which  have given  rise to these proceedings.  The Co-operative  Society of  which  the appellant was the  President  till  November, 1951, held a licence, under the Madras General Sales Tax Act for doing business as a Commission Agent and the Society was earning commission on the turnover of the sales effected  of the  agricultural  produce of its members  and  others.   In October,  1950 the Government of India promulgated  the  Gur Control Order fixing the maximum price at which gur could be sold  in  different States.  The prices  fixed  varied  from State  to State.  The prices fixed for sale  at  Anakapalli, then in the State of Madras, were somewhat lower than  those -which  had been fixed in other States.  This gave  occasion for  the  members of the Society to sell  their  jaggery  at higher  prices  than  fixed because  there  was  demand  for jaggery from merchants at prices higher than the  controlled price.  It was alleged that while on paper the  transactions entered  into  between the members of the  Society  and  the purchasers  showed  sales  at the prices fixed  by  law,  in reality, higher prices were charged.  As stated already, the Society  was  entitled  to charge commission  on  the  sales effected  through  it.  As regards this it was  stated  that commission  was earned on the entire price at which the  gur was sold, and while the amount of commission payable on  the basis of controlled prices was credited to the Society,  the commission  earned in respect of the extra price  which  its members obtained,           189 was, it was stated, not brought to the credit of the Society in   its  accounts  but  appropriated  by  members  of   the



management.   These were, the allegations and it is  on  the basis  of  these  allegations that  the  claim  against  the appellant and others had been made.  Their correctness  have yet to be tested in the arbitration proceedings. When this claim was made, inter alia, against the  appellant viz., of not bringing into the Society’s accounts moneys due to  the  Society  and which had been  earned  through  sales effected  by  the Society, he filed, as narrated  before,  a writ petition and there raised three points challenging  the legality  of  the  reference to   the  Deputy  Registrar  to enquire into and determine the claim. The first was that the transaction on the basis of which the claim was said to have arisen  was illegal being contrary to the Gur Control  Order issued  by  the  Central  Government  under  the   Essential Supplies Act and such an illegal transaction could not  fall within  the  words  "Dispute touching the  business  of  the Society" which alone could be referred to arbitration  under s.  51 of the Act; the second was that the reference by  the Registrar  of the dispute to the arbitration of  the  Deputy Registrar  was  illegal  as  contrary  to  natural  justice, because  (a) the Deputy Registrar had conducted  an  enquiry which had resulted in the supersession of the management  of the  Society  under s. 43 of, the Act, and  (b)  the  Deputy Registrar being a subordinate of the Registrar could not  be expected to act fairly in this matter; and lastly, that  the Registrar  should, in this case, have proceeded under s.  49 of  the  Act  and not under s. 51,  the  former  being  more advantageous  to him, in that he could challenge  any  final order against him by resort to the civil courts, where-as an award  under s. 51 was subject to departmental  appeals  and could  not  be  questioned in a civil  court.   The  learned Single  Judge rejected the second and the third  points  but upheld the first.  His reasoning was that the transaction of sale above the controlled price was illegal, that illegality was  a bar to a claim for accounting by the Society  against its  officer or agent, notwithstanding that the contract  of agency itself was not illegal.  On appeal the learned Judges of the High Court have, as stated earlier, rejected all  the three points urged on behalf of the appellant. Mr.  Ram  Reddy, learned counsel for  the  appellant  raised before  us  three points.  The first of them  was  that  the Registrar should have proceeded under s. 49 and not under s. 51 of the Act.  Section 49, which learned counsel says,  was attracted  to  the  case runs, to quote  only  the  material provision: Sup/64----13 190               "49. (1) Where in the course of an audit under               section  37 or an inquiry under section 38  or               an inspection under section 3 9 or the winding               up  of a society, it appears that  any  person               who  has  taken part in  the  organization  or               management  of  the  society or  any  past  or               present    officer   of   the   society    has               misappropriated  or fraudulently retained  any               money  or  other property or  been  guilty  of               breach  of trust in relation to  the  society,               the Registrar may, of his own motion or on the               application of the committee or liquidator  or               of any creditor or contributory, examine, into               the conduct of such person or officer and make               an order requiring him to repay or restore the               money  or  property or any part  thereof  with               interest at such rate as the Registrar  thinks               just  or to contribute such sum to the  assets



             of  the  society  by way  of  compensation  in               respect  of the  misappropriation,  fraudulent               retention or breach of trust as the  Registrar               thinks just.               (2)The  order of the Registrar  under  sub-               section  (1) shall be final unless it  is  set               aside    by   the   District   Court    having               jurisdiction  over  the  area  in  which   the               headquarters of the society are situated or if               the  headquarters of the society are  situated               in  the  City  of Madras, by  the  City  Civil               Court,  on  application  made  by  the   party               aggrieved  within three months of the date  of               receipt of the order by him."               and s. 5 1 -the other provision-runs               "Arbitration :               Disputes:51.   If any dispute  touching  the               business of a registered society (other than a               dispute regarding disciplinary action taken by               the  society or its committee against  a  paid               servant of the society) arises-               (a)               (b)               (c)   between the society or its committee and               any  past  committee, any  officer,  agent  or               servant,  or any past officer, past  agent  or               past  servant, or the nominee, heirs or  legal               representatives   of  any  deceased   officer,               deceased  agent  or deceased servant,  of  the               society, or               (d)               Explanation.-A  claim by a registered  society               for  any  debt  or demand due  to  it  from  a               member,  past member or the nominee,  heir  or               legal  representative  of a  deceased  member,               whether  such  debt or demand be  admitted  or               not,               191               is  a  dispute touching the  business  of  the               society  within  the  meaning  of  this   sub-               section.               (2)   The  Registrar may, on receipt  of  such               reference,-               (a)   decide the dispute himself, or               (b)   transfer  it for disposal to any  person               who has been invested by the State  Government               with powers in that behalf, or               (c)   subject   to  such  rules  as   may   be               prescribed,  refer  it  for  disposal  to   an               arbitrator or arbitrators." In  this connection learned Counsel relied on a decision  of the  Madras  High  Court  in Sundaram  Iyer  v.  The  Deputy Registrar  of Co-operative Societies.(1) There it  was  held that it was only in case where the provisions of s. 49  were inapplicable that recourse could be had to s. 5 1. In  cases where  a  matter  fell both within ss. 49 and  51,  the  two provisions  were not intended to operate on parallel  lines. As s. 51 excluded the jurisdiction of civil courts, it  must be strictly construed and for that reason, in cases where s. 49 was applicable, s. 51 would be excluded.  Further, it was held  s. 51 was of a general nature providing for a  variety of matters and was almost exhaustive of the parties  between whom as well as the disputes that could arise in cooperative societies.  Section 49 on the other hand dealt with  special types of disputes which arise in exceptional  circumstances,



segregated  out of the larger group dealt with under s.  51. When there was thus an overlapping of the terms of both  the sections the provisions of S. 49 alone it was held would  be applicable.  Based on this line of reasoning, the submission of  learned counsel was that the claim in the  present  case was one "against a person in management of the Society"  and "for the fraudulent retention of money or other property  of the Society" and, therefore, it was completely covered by s. 49 and that in consequence the Registrar had no jurisdiction to direct an enquiry by the Deputy Registrar under s. 51  of the  Act.  This argument, however, proceeds on ignoring  one further essential requisite for the application of s. 49(1). Besides  the two factors to which learned  counsel  referred and  which  we  have just set out,  there  is  also  another condition which has to be satisfied before s’ 49(1) could be attracted.   The facts giving rise to the charge have to  be disclosed  in  the  course of an audit under  s.  37  or  an enquiry  under s. 38 or an inspection under s. 39 or on  the winding  up  of  the  Society.  Mr.  Ram  Reddy,  while  not disputing that unless this condition is also satisfied s. 49 would not be attrac- (1)  I.L.R. [1957] Mad. 371. 192 ted, however submitted that there was an enquiry under S. 38 preceding  the  supersession  and that  in  consequence  the condition  was  fulfilled.   It is true that  there  was  an enquiry  conducted the affairs of the Society under  s.  38, but that by itself is not sufficient.  It has further to  be proved that the facts alleged in the claim, and on which  it is  based,  were  disclosed at that enquiry.   This  can  be proved  or established only if the enquiry report which  was submitted to the Registrar was placed before the, Court  and the  facts  disclosed therein corresponded  with  the  facts alleged  in the statement of claim.  Mr. Ram Reddy  admitted that the enquiry report was not before the Court and is  not in  the record of these proceedings.  It is not,  therefore, possible  to  say that there is correspondence  between  the facts  disclosed in that report as a result of  the  enquiry under s. 38 and those found in the Statement of Claim  which was  referred by the Registrar to the Deputy  Registrar  for arbitration under s. 5 1. The case must, therefore, be  held not  to fall under s. 49 of the Act.  ’Mere can be no  doubt that if S. 49 does not apply, subject to the other  argument about illegality to which we shall advert, the order of  the Registrar  proceeding under s. 51 is not open to  objection. This first point,, therefore, has to be rejected. The next contention of learned Counsel was that the  dispute about the retention of money belonging to the Society by the appellant  was not "a dispute touching the business  of  the Society." The argument was that the expression "business  of the  society included only what was legally  permissible  as the  legitimate  business  of  the  Society  and  since  the business  activity  out  of  which  the  claim  against  the appellant  was alleged to arise involved a contravention  of the  Gur  Control Order it was not "a dispute  touching  the business  of the society.  We are unable to agree with  this submission.   In  so far as it impinges on the  third  point urged  by learned counsel based on the maxim Ex turpi  causa non  oritur actio we shall deal with it in considering  that submission.  But that apart, we do not see any basis for the argument that the claim made before the arbitrator was not a dispute touching the business of the Society.  It could  not be  disputed that the sale of the produce belonging  to  the members  of  the  Society was part of the  business  of  the Society, and then the charging of commission for those sales



and  the  crediting  of the  Society’s  accounts  with  that commission  would  equally be the business of  the  Society. Apart, therefore, from the question of illegality raised  by reason  of  the  sale  being it  prices  in  excess  of  the controlled  price.  it is not capable of Argument  that  the failure on the part of the appellant to credit 193 to  the  Society the full amount of commission  due  on  the sales  effected  by  him on behalf of the  Society  and  the resistance  by  him of that demand, would not be  a  dispute touching  the  business of the Society.  This  objection  is clearly without substance and must be rejected. The last of the points urged by learned counsel was that the transaction  of  sale  which gave  rise  to  the  commission alleged  to  be  improperly retained was  illegal  and  that therefore the Society could not, in law, make a claim on the basis  of such an illegal transaction.  We see no  substance in  this  point  either.   No  illegality  attached  to  the contract  between  the appellant and the Society;  that  was perfectly  legal.   It  arose out of  his  position  as  the President  of  the  Society and he was,  in  law,  bound  to account for the moneys he received on behalf of the Society. The  fact  that he entered into illegal  transactions  would have  no  bearing on the right of the Society  to  make  the claim  for an account of the commission due to  the  Society which  he unjustly withheld.  We consider the  reasoning  of the  learned  Judges of the Division  Bench  rejecting  this argument  to  be  correct.  Moreover this  matter  has  been examined by this Court in a decision reported as Kedar  Nath Motani  v.  Prahlad  Rai(1) and in  view  of  this  decision learned counsel for the appellant did not himself press this point very seriously. Before parting with this case, however, there is one  matter to  which  it is necessary to advert.  The  learned  Judges, after  allowing the appeal. of the Society, stated in  their judgment :               "Lastly,  we must observe that this  Court  is               averse to lend its helping hand to persons who               want  to defraud others.  Even  assuming  that               any  error of law was committed by  Tribunals,               that  would not be a ground for  invoking  the               extraordinary jurisdiction of this Court under               Art.  226 of the Constitution, when it is  not               in   furtherance  of  justice  but  tends   to               encourage dishonesty." Mr. Ram Reddy pointed out to us that the correctness of  the allegations  made in the claim filed before  the  arbitrator have  yet  to  be  decided  and  there  was,  therefore,  no justification for the learned Judges assuming that the facts stated  therein were proved and that the appellant had  been guilty of fraud or dishonesty in his conduct of the business of  the Society.  We see force in this complaint of  learned counsel.   In the circumstances, we would add  that,  having regard  to  the  stage at which the matter  was  before  the Court, the learned Judges were in error in making (1)  [1960]1 S.C.R. 861. 194 these observations.  It is clear that they did not intend to prejudice  the  appellant in his defence before  the  Deputy Registrar in the arbitration proceedings under s. 51 of  the Act  but it is possible that it might have such  an  effect. What  we have said earlier must suffice to dispel  any  such apprehension or effect. The appeal fails and is dismissed with costs, one set. Appeal dismissed